Hi, I am working on a strategy that requires me to short stocks that are expensive to borrow. In many cases it is impractical to create synthetic short stock via options so I would like hear your opinions on an alternative way. When selling stocks you need to deliver the sold stock to the buyer within three days, so to sell short I need to borrow the stock from someone before this deadline. To avoid this I am considering to repeatedly selling short and covering within three days (when it is cheaper than to borrow the stock) for the entire period where I need to be short. Anyone know if this is allowed? Kind regards, Steffan
That's not the way it works. If you're selling a stock short, that's NOT on the easy to borrow list, you MUST get a locate from your clearance firm,before you short the stock. If you get the locate, it's not your responsibility to find stock to deliver. The short borrow responsibility goes to the clearance firm which is the one that's short, because in a margin account your positions are held is 'street" name, not yours. If they fail on delivery, they will let know know if they have buy in risk, and how much of that buy in will be your responsibility. Synthetic shorts through either options or synthetic products that some firm offer, typically cost more that the stock borrow, but remove all or most of the buy in risk. For me, I like to keep it simple. I get a locate and sell short. If I can't get the locate, I use options to get short deltas.
Thank you for your reply. I am referring to situations where I am able to locate the stock at the point of sale (stock can be borrowed) but the borrowing costs are high. Sometimes it is cheaper to âroll overâ the position every three days than to actually borrow the stock and deliver it. Sorry for not having explained this good enough. Kind regards, Steffan
+1 to everything ase1245 said. re the op's latest post that mentioned "rolling over" every 3 days to avoid high borrow costs, IMO there is no way around the high borrow costs otherwise everyone would've done it. like ase1245 said, your options (pun intended) are limited: long puts or short and pay high borrowing costs (remember your gains from shorting must be higher than the costs of the borrow - i've seen some borrow rates above 100% annualized so if you made 10% shorting XYZ in a month (a great return) you've broken even essentially). long story short (more puns - curse of a trader) there is no way around the borrow process.
The SEC recently fined a market-maker for trying to get around the borrow process: Respondent shall, within ten (10) days of the entry of this Order, pay disgorgement of $1,500,000 and prejudgment interest of $336,094 and a civil money penalty in the amount of $250,000 to the United States Treasury. http://www.sec.gov/litigation/admin/2011/34-65941.pdf
Shorting anything but high volume stocks is so unpredictable just avoid it. Focus on shorting smaller contracts if you have to. MY $0.02
+1 to the answers above. I also want to clarify that it isn't up to you personally to deliver the borrowed shares on T+3. There is a whole middle-office process about inventory and delivery instructions. I assume that we are talking about US stocks (other countries have variations from this paradigm.) If you don't want your prime to close your account, T+1 is about as late as you can secure your borrow (with T+2 delivery.) Doing a locate on T+3 isn't going to do anything. The prime needs to negotiate with a counterparty, match settlement instructions (remember these have collateral), settle the borrow delivery-for-payment, match settlement instructions on your short/sell, and settle the sell delivery-for-payment. The question seems a bit odd anyhow. You shouldn't be paying for the borrow (haircut on the collateral interest) until T+2. Even if you cover and short on T+1, it doesn't matter to the prime. The short will still settle before the cover, and they will maintain a standing borrow to support your flickering position.